Savings Rate vs Investment Rate

Before getting into my topic today, I just wanted to take a second to reflect and wish everyone a Happy belated Thanksgiving! This year has been an absolute whirlwind for me with getting married, getting Lasik, starting this blog and all the little things that have happened in between. So, cheers to my wife, family and friends that have made this year so far as amazing as it has been and let the good times roll!

Now back to your regularly scheduled finance program!

Investing and saving. Sounds like they mean the same thing, right? Not necessarily. In doing our finances, I’ve broken these two terms down to mean very different things. The reason I did this was related to a Mr Money Mustache, MMM, article that I had read several years ago called “The Shockingly Simple Math Behind Early Retirement”. This article has a great chart in it showing how the percentage of income saved equates to a number of working years needed until retirement.

The Shockingly Simple Math Behind Early Retirement- MMM

Immediately after reading this article, I went back and crunched some numbers because this is my idea of a great Friday night. My wife thinks I’m nuts. Anyway, I crunched the numbers and the way I had been calculating our savings rate had us retiring in 8.5 years. I was absolutely, out of my mind thrilled. Until I started to dig into this a bit and realized: “Wait…. we’re saving all of this money but, that doesn’t mean that we’re investing all of it.”

What I had been doing was counting the following account contributions under the general statement of savings rate:

401K

Roth IRA

HSA

Taxable brokerage accounts *cough* Vanguard is the best *cough*

Debt repayment

Emergency fund

Savings

Travel fund

However, not all of these things count towards our ability to actually retire early, or at all for that matter. What does count towards our retirement are our investments. This is money being set aside as “Fuck you money”, nod to JL Collins on that one, so that I can tell my windowless cubicle to stick it where the sun don’t shine whenever the fancy strikes me. This would include contributions to:

401K

Roth IRA

Taxable brokerage accounts

Debt repayment

The other accounts mentioned are still savings but, they may not and do not, in our case, directly contribute to our ability to retire early. When I say our ability to retire early, I mean that we will use these accounts to cover all of our regular living expenses with regular withdrawals being made from these accounts over many years. The reason that I put debt repayment into this category as well is that when we finish paying off our debts, namely my wife’s student loans and car loan, we will funnel this money directly into our investment accounts.

In relation to the other forms of savings, I would like to delve into these a bit further. Starting with emergency fund, this account is a necessity to ensure that the unexpected bills do not derail us just because they were not “in the budget.” However, it will not be an account that we tap into in order to sustain our regular bills in retirement. The general rule of thumb for this account is 3-6 months of living expenses for the household.

Since Kayla and I have agreed to prioritize traveling in our lives, we’ve decided to save for this recurring goal separately from other savings. This ensures that we know exactly what we have available to travel for the coming year or if we have a particular vacation in mind, we can put that money aside just for this special vacation.

General savings pertains to any money that we set aside for known expenses that we may have coming up. This could be anything from car repairs and taxes to Christmas/Birthday presents. This will obviously differ for everyone but, it is clear that the money I want to save for me to buy Kayla a watch for Christmas should not count towards our overall savings rate.

The main difference in these accounts is the timeline that you will be spending this money. If this money is being used in the near term on something that doesn’t increase your net worth, then I would deem that money savings. If this money is being used in the long term to buy a house, purchase shares in a 401K, IRA or Brokerage account that will then not be dipped into until after the point of “retirement,” then I would deem that money investments.

Just take the time to be certain of when you will need this money you are saving so you do not count your chickens before they hatch.

Lastly, cheers to “Fuck you money”. Something else to add to the ever growing list of things to be thankful for.

How do you calculate your savings and/ or investment rate? Let me know in the comments below.